Updated: Jan 25
Since my first exposure to the concept of insurance I’ve thought it was an odd concept. Pay somebody else regularly so that they will cover my possible future expenses? Why not just save my money and pay the bill myself? Indeed, lots of insurance products out there still don’t make sense to me for that very reason. But the idea of shifting a large, unknown risk onto an insurance company through smaller, known and regular payments is actually pretty cool.
In particular, good life insurance feels to me like of the cheapest and best investments I can make in my family’s security. I hear Dave Ramsey promoting term life insurance on his radio show almost every single day. This year I bought some. Let me tell you why I decided that I needed it, what exactly I bought, and what the process was like.
Why buy life insurance?
As I mentioned, insurance is about risk management. When you buy an insurance product you are paying the insurance company to assume a risk on your behalf. Life insurance is about managing the risk of your untimely death. There is nothing more certain than that you will die. The only questions are when, how, and, if you have any dependents, how they will be provided for without you. Obviously there is no way to prevent or ease the extreme emotional consequences of that scenario, but it’s pretty cool to me that I can take the possibility of financial struggles out of the picture so that, if I did pass away, my family could focus on grieving instead of figuring out how they were going to eat and keep the lights on.
I decided that this was the time for me to buy life insurance because I am the primary money earner in our household and because we are planning to have kids soon. In other words, there are people counting on my income to survive. If you are unmarried with no kids, you probably don’t need life insurance, although I believe you can buy a small $10,000 policy to cover burial expenses if you like. If I were in that situation, though, I think I would focus on becoming debt free and building savings so that there would be cash available to cover those costs if I died.
What did I buy?
I bought a $500,000, 20 year term policy. Let me break that down. A term life insurance policy is in effect for a specified number of years, the term. Mine has a 20 year term so it will expire around my 50th birthday. The value of the policy is $500,000. That is the amount of the pay-out if I pass away. It is equivalent to a little more than 10 years of my income so what she would do is invest that money in a good mutual fund and she should be able to live off of the annual earnings without ever touching the principal.
How does it work?
To start shopping for the right to policy all I did was get some quotes online. I checked State Farm because our auto policies are with them and I checked Zander Insurance because they are an independent agent that shops for the best price from lots of providers. All I had to know to get a quote was how much insurance I wanted to buy and for what term. I had to tell what field I work in, answer one or two questions related to my health and then select a “category” describing my overall physical health.
This is a little tricky. The insurance company will give you a quote for whatever health category you select but they did not confirm that I was actually eligible for that price until after I had already signed for the policy and paid my first year’s premium. In fact, the price did go up by $135/year after the results of my physical came back. They were not deceptive about it. They told me the premium could change, but the process is set up to get you to buy before your price is confirmed. I think the way to combat this is to be very realistic with yourself when rating your health and pay close attention to their guidelines. Maybe you could try to quote one level down, and thus more expensive, than you think you would actually qualify for or perhaps you could try to force them to process your physical before you buy. If you do buy and they then increase your premium more than you like, you could always cancel the policy and get your money back. I didn’t balk too much partially because I anticipated it and partly because the premium still seemed very inexpensive in comparison with the amount of insurance I bought.
After procuring my quotes and deciding to go with State Farm, I spoke with my agent’s staff who arranged for a phone interview and a physical. The purpose of these is to confirm your eligibility and your premium. The interview took about 15 minutes and consisted of some basic health questions and questions about my job. The physical also took about 15 minutes. The insurance company contracted with some medical services company who sent someone to my house to take height and weight measurements, blood pressure, and blood and urine samples. Very quick and painless. At this point I had already paid my first premium so the policy was in effect. About one month later when the results came back and they increased my premium I just had to go down to the agent’s office to pay the difference to complete the whole process.
In the future, as my income increases and our family grows we will add policies to keep the amount of insurance at 10 times our annual income and in order to push back the date that we will become uninsured because we will probably want to continue to be covered at least until all the kids are out of the house. We will also purchase coverage for Susannah.